The Economy and Iowa Credit Unions February 18, 2013 Bill Hampel, Chief Economist Credit Union National Association bhampel@cuna.coop

Agenda The economic outlook through 2014. An unusual interest rate forecast. Credit union finance.

Economic Summary In the fifth year of recovery. Unemployment still lagging. Inflation nowhere in sight. Prospects improving for a sustained recovery: escape velocity. External and political risks much reduced.

Gross Domestic Product Quarterly Changes at Annual Rates, Real 2014 Forecast 2001 Recession

Household Finances But still room for further improvement: Recovering: Saving positive again Debt burden falling Stock market recovered But still room for further improvement: Debt burden still relatively high Home prices rising, but still off peak Improving ability to spend, lagging willingness Demand backlogs building

Household Debt Outstanding To Annual Disposable Income 99% Consumer

US Home Prices S&P/Case-Schiller National Index

S&P 500 Monthly Averages

Non-Farm Payrolls Monthly Changes SA

Unemployment Rates and Recessions Percent of the Labor Force

Consumer Confidence Conference Board Jan: 80.7

Consumer Price Inflation 1970 to Present, Annual Rates 12 Months to Dec Top Line = 1.5% Core = 1.7%

Interest Rate Outlook

Interest Rates 1988 to Present

Interest Rates 1988 to Present

The Fed’s Monetary Policy Was clear, but ? Fed Funds Rate Policy No change until unemployment reaches 6.5%, unless inflation outlook rises substantially? Quantitative easing (monthly purchases of long-term securities) “Tapering” began in December, was to end around time unemployment rate reached 7%. Likely $10 billion more each FOMC meeting.

“Real” 10 Year Treasury Yield Current Yield Minus Trailing One Year Core CPI

Treasury Yield Curves

Yield Curve Change since April Basis Points

Credit Union Outlook Through 2014 Moderate savings and asset growth Low interest rates Strengthening loan growth Household de-leveraging is moderating Improving confidence, building backlogs Loan delinquencies and losses about back to normal Modest outlook for net income See below Rising net worth ratios

Credit Union Loan Growth Annual Percent Change

Credit Union Delinquency Dollars Delinquent as Percent of Total Portfolio

Net Loan Charge-0ffs Total Portfolio

Credit Union Savings Growth Annualized Percent Change

Credit Union Net Income To Average Assets

Net Capital to Assets

What’s Driving Earnings? POSITIVES: Lower provision expenses Lower stabilization assessments NEGATIVE, for a while longer: Net Interest Income TURNING NEUTRAL Mortgage refinance revenue AT LONG-TERM RISK Debit interchange revenue

What’s Driving Earnings? POSITIVES: Lower provision expenses Lower stabilization assessments NEGATIVE, for a while longer: Net Interest Income TURNING NEUTRAL Mortgage refinance revenue AT RISK Debit interchange revenue

Corporate Stabilization Assessments Basis Points of Insured Shares ?

Corporate Stabilization Assessments Basis Points of Insured Shares !

Corporate Stabilization Fund July 2010 2011 Q2 2011 Q4 2012 Q2 2012 Q4 2013 Q2 2013 Q3 Est. Total Loss $15.0 $13 $13.3 $13.1 $12.5 $11.1 $9.3 Lost Corp Cap $5.6 Assessments $1.3 $3.3 $4.1 $4.8 Total Paid $6.9 $8.9 $9.7 $10.4 Remains to Pay $8.1 $4.4 $3.4 $2.8 $0.7 -$1.1

Corporate Stabilization Fund July 2010 2011 Q2 2011 Q4 2012 Q2 2012 Q4 2013 Q2 2013 Q3 Est. Total Loss $15.0 $13 $13.3 $13.1 $12.5 $11.1 $9.3 Lost Corp Cap $5.6 Assessments $1.3 $3.3 $4.1 $4.8 Total Paid $6.9 $8.9 $9.7 $10.4 Remains to Pay $8.1 $4.4 $3.4 $2.8 $0.7 -$1.1 A negative assessment is a rebate, eventually.

What’s Driving Earnings? POSITIVES: Lower provision expenses Lower stabilization assessments NEGATIVE, for a while longer: Net Interest Income TURNING NEUTRAL Mortgage refinance revenue AT RISK Debit interchange revenue

What’s Driving Earnings? POSITIVES: Lower provision expenses Lower stabilization assessments NEGATIVE, for a while longer: Net Interest Income TURNING NEUTRAL Mortgage refinance revenue AT RISK Debit interchange revenue

Interest Rates 1988 to Present